Like everyone else, most poor people need and use financial services all the time. They save and borrow to take advantage of business opportunities, invest in home repairs and improvements, and meet seasonal expenses like school fees and holiday celebrations. The financial services available to the poor, however, often have serious limitations in terms of cost, risk, and convenience. Moneylenders, for example, often charge usurious interest rates on loans. Buying goods on credit is far more expensive than paying in cash. Local rotating savings and credit circles take deposits and give loans only at rigid time intervals and in strict amounts, and often result in the loss of members' money.
Beginning in the 1950s, development projects began to introduce subsidized credit programs targeted at specific communities. These subsidized schemes were rarely successful. Rural development banks suffered massive erosion of their capital base due to subsidized lending rates and poor repayment discipline and the funds did not always reach the poor, often ending up concentrated in the hands of better-off farmers.
In the 1970s, experimental programs in Bangladesh, Brazil, and a few other countries extended tiny loans to groups of poor women to investment in micro-businesses. This type of microenterprise credit was based on solidarity group lending in which every member of a group guaranteed the repayment of all members.
Through the 1980s and 1990s, microcredit programs throughout the world improved upon the original methodologies and bucked conventional wisdom about financing the poor. First, it showed that poor people, especially women, had excellent repayment rates among the better programs, rates that were better than the formal financial sectors of most developing countries. Second, the poor were willing and able to pay interest rates that allowed microfinance institutions (MFIs) to cover their costs.
These two features—high repayment and cost-recovery interest rates—permitted some MFIs to achieve long-term sustainability and reach large numbers of clients. In fact, the promise of microfinance as a strategy that combines massive outreach, far-reaching impact, and financial sustainability makes it unique among development interventions.
Today, the microfinance industry and the greater development community share the view that permanent poverty reduction requires addressing the multiple dimensions of poverty. For the international community, this means reaching specific Millennium Development Goals (MDGs) in education, women's empowerment, and health, among others. For microfinance, this means viewing microfinance as an essential element in any country's financial system.
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Click on each question to find short answers to Frequently Asked Questions, or FAQs, about financial services for the poor.
What Is Microfinance?
Who Are the Clients of Microfinance?
How Do Financial Services Help the Poor?
What Is the Relationship between Microfinance and the Millennium Development Goals?
What Is a Microfinance Institution (MFI)?
Can Financial Services for the Poor Be Profitable?
Why Do MFIs Charge High Interest Rates?
How Do Poor People Save?
How Can Donors Best Support Financial Services for the Poor?
When Is Microcredit NOT an Appropriate Poverty Intervention Tool?
What Is the Government's Role in Microfinance?
What Is the Role of Regulation and Supervision in Microfinance?
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